Canada: Ombudsman and Tax Shelters

A taxpayers’ ombudsman’s special report (Donor Beware, December 2013) concludes that the CRA could do more to meet its legal obligation to warn and educate taxpayers about the dangers of participating in questionable tax shelter donation schemes. The taxpayer in David (2014 TCC 117) was allowed to claim a tax credit for his cash donation, but he failed in the arguments that mirrored the ombudsman’s criticisms of the CRA’s handling of tax shelters.

The ombudsman’s report. The report notes that individuals and charities sometimes participate in tax shelter donation schemes that do not comply with the Act. Donors participate in these schemes to receive an inflated tax refund, even though they also may have honestly believed that the tax shelter was legal because the promoters provided supposed proof of value. According to the ombudsman, donors allege that they were unaware of the tax consequences of the schemes; they also allege that the CRA does not provide enough information warning them about the consequences in a timely manner. As a result, donors find themselves owing large amounts to the CRA.

The report states that the Taxpayer Bill of Rights provides that a taxpayer is entitled to be informed in a timely manner about existing questionable tax schemes. However, the CRA says that it cannot inform taxpayers of a tax scheme’s audit because the law prohibits the disclosure of a taxpayer’s private information.

Although the CRA warns and informs taxpayers about questionable tax schemes on its website and in newspapers, magazines, and other media sources, the ombudsman’s report concludes that there are additional ways that the CRA could improve its communications about these schemes. The report recommends that the CRA continue to develop and apply communication strategies to warn taxpayers about the potential consequences of donation schemes, and to determine key audiences and distribution targets. The report also advises the CRA to develop and distribute effective communication products that show clear examples of offside tax schemes, and to monitor tax scheme trends and make that information publicly available. The report also recommends that the CRA explore ways to prevent promoters from using CRA information in the promotion of their products and to warn the public that a tax shelter identification number is not evidence of the CRA’s approval or the shelter’s legality.

Inflated donation receipts do not negate a charitable gift. In David, the TCC allowed a taxpayer to claim a donation tax credit for the cash portion of a donation made under a donation scheme. The taxpayer argued that he should be entitled to claim some or all of a donation tax credit on his 2006 tax return, and interest and penalties should be waived because he was not adequately warned by the CRA about a donation scheme he participated in. (Those issues were recently investigated in the special report of the taxpayers’ ombudsman, discussed above.) Although the taxpayer was likely aware that he was claiming an inflated tax credit on his return, the TCC determined that his awareness was not a sufficient reason to deny the tax credit entirely.

In David, the taxpayer argued that the CRA was partly responsible for his participation in a charitable donation scheme in 2006 because the promoter was listed as a registered charity on the CRA website and the website did not indicate any concerns about fraudulent activities. Following a CRA investigation, the charity lost its charitable registration status in 2007, and the charity’s president pleaded guilty to selling false donation receipts. The taxpayer alleged that he would not have participated in the donation scheme if the CRA had issued a warning about the charity.

The TCC denied the taxpayer’s request to claim a donation tax credit on his 2006 tax return based on the face amount of the donation receipt. The TCC noted that a tax credit can be claimed only to the extent allowed under subsection 118.1(3), which provides that the amount of the tax credit is determined by the amount of the gift.

Because of the uncertainty in the law about whether an inflated tax receipt is considered a benefit that negates a gift, the TCC held the appeal in abeyance pending guidance from the FCA decision in Berg (2014 FCA 25). That case confirmed that the receipt of a benefit negates a gift, but it did not address the question of whether an inflated tax receipt is considered a benefit. The TCC concluded that issuing an inflated tax receipt should not be considered a benefit that negates a gift except in extraordinary circumstances. As a result, the TCC concluded that the taxpayer was entitled to a tax credit equal to 10 percent of the amount on the donation receipt issued by the charity for his 2006 taxation year and that any assessed penalties should be vacated.

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